With so many different home loan options and terms, how do you know what’s best for you? Finding the perfect home loan in California begins with understanding your mortgage options.
Lenders offer two basic types of mortgages, fixed-rate mortgages and adjustable-rate mortgages
. While you will likely find different loan options within those two categories, your first decision is choosing whether you want a mortgage with an interest rate that never changes during the period of the loan, or one that starts low but varies over the loan period (either up or down).
Fixed-Rate Mortgages: Predictability
When it comes to budgeting, you know what you’ll get with a fixed-rate mortgage.
- Fixed Interest Rate: Fixed-rate mortgages offer an interest rate that will never change during the term of your mortgage. If you’re borrowing during times of low interest rates, this is a valuable perk because you’ll pay less money in interest.
- Predictable Payments: With a fixed-rate mortgage, your monthly total amount paid for principal and interest will not change. However, if your municipality increases taxes every year, as most do, you’ll see an increase in your monthly payment if you’re paying your taxes through your mortgage payment and not separately. Due to amortization, more of your payment will go toward interest in the first years of your mortgage. In the latter stages of your mortgage term, more of your monthly payment will go toward principal.
- No Surprises: Because your rate is fixed, it’s easier to figure out your monthly allocation for housing. But if you’re borrowing during a time of high interest rates, this mortgage’s payments might be less affordable than other options.
- Term: Another factor to consider with a fixed-rate mortgage is the term of the loan. Thirty years is the most popular option because it offers the lowest monthly payment. However, you’ll pay more for your home over the life of the mortgage compared to a 15-year or 20-year term, since you’re paying 10 or 15 additional years of interest.
Fixed-rate mortgages are best for you if…
- You want to know what you’re going to pay for your mortgage every month.
- You plan to live in the home for 10 years or more.
- You’re borrowing during a period of low interest rates and the first two points apply to you.
Adjustable-Rate Mortgages: Flexibility
An adjustable-rate mortgage (ARM) offers attractive features for some borrowers.
- Fluctuating Rate: The interest rate for these mortgages will adjust frequently over the life of the loan, depending on how the mortgage is structured, after a specific period when the rates is fixed, usually one, three or five years. In the early stages of the ARM, your interest rate will be lower than the lowest rates offered on a fixed mortgage. Depending on market conditions, your ARM can increase sharply or gradually, or it could decrease. It’s uncertain, which is why it’s important for you to determine that you can afford larger monthly payments if your mortgage adjusts upward.
- Larger Loan: Along with lower initial payments, you can also qualify for a larger loan because you’re not paying as much in interest at the start. If interest rates continue to decrease, you’ll enjoy lower mortgage payments and lower rates without refinancing your mortgage.
- Interest Rate Ceiling: There is a ceiling that caps your ARM’s rate increases, which varies by lender. Your interest rate will adjust based on activity of a particular index, such as interest rates on certificates of deposit or Treasury bills. Keep in mind that interest rates on ARMs can double within a few years.
Adjustable-rate mortgages work for you if…
- You want an initial rate that starts below current market rates for fixed mortgages.
- You plan to live in your house for approximately five years or fewer (or before the fixed-rate period ends).
- Interest rates are relatively low now, and you believe they could go lower in the future.
Buying a home in the Southern California is exciting! Make sure to select the right type of mortgage
. Use our total loan costs calculator
to figure out what your monthly payments would be with different interest rates and loan terms, or the total mortgage costs calculator
to weigh more variables including PMI and more. Contact our mortgage officers
to see what type of mortgage would work best for you.